I like ideas with trading pairs where the two legs are moving mostly in the opposite direction and both can provide earnings. Or, the one can produce more earning than the losses of the other. The contrary movements reduce the risk, but there is a chance to produce a positive total balance of the trades.
Such an idea was earlier shorting Tesla and shorting volatility (VIX). In this case, if the overall market is climbing, Tesla is supposed to climb, and VIX-shorts provide a nice return. Even if nothing happens, because of the intererest-like income from contango. If the market goes down, Tesla – very probably – also goes down. (Maybe more than the market average.) In this case I loose on the VIX trades but gain on Tesla short. (The trade from last year is in a slightly positive territory now. See here.)
Contango and dividend?
The contango – the case as near futures (settlements) prices are lower than far ones – provides a constant income for short sellers if the prices stagnate or go down. If prices jump, you have bad luck and loose. But there are also big oil companies on stock exchanges. Their shares prices are surging if crude increases and falling if oil price’s direction is down.
So, the idea is: buy oil companies with good dividends and sell crude, if it is in contango. If nothing happens, you can cash in the dividends from the companies and cash in the contango-related income from the oil short selling. If oil price goes down or up, you can win at least on one on the both trades.
Waiting for the right moment
The dividend yields of some mayor oil multinational holdings can reach 5-6 percent per annum; the FILL ETF (iShares MSCI Global Energy Producers ETF) has a dividend yield of 2.79 percent. Source Much more can be worth the contango income, sometimes reaching 1-2 percent a month.
The problem is, there is no real contango in crude prices at the moment. WTI type oil has only 0.1 percent per month, and Brent type oil, –0.5-0.6 percent. (The latter isn’t in contango, it is in backwardation.) But historically, oil and other commodities spend more time in contango than in backwardation, so I’m making my research and waiting for the right moment.
(Chart courtesy of Stockcharts.com)
How would have performed this strategy in the past? It depends on the ETF. At the chart, you see the DTO /DB Crude Oil Double Short ETN/ short ETF and three different long stocks ETF’s for oil companies. FILL is global, XOP is for the American oil sector and XLE is a selection of the largest US firms. Provides a “concentrated exposure to the giants of the oil and gas industries”. (Etf.com)
New questions
The chart shows that in the last seven years, with WTI falling from appropriately 105 to 62, FILL stagnated, XOP fell 41 percent and XLE surged 11 percent. The double-short DTO jumped 38 percent.
The result is a little confusing and new questions are surging. Why are the differences between the oil sector ETF’s so big? Why hasn’t short DTO ETF performed better? Which ETF-s or other products should we chose if the right moment comes? Or is this idea bad, or too risky?
Please, if you have answers, critics or other thoughts don’t hesitate to comment me.
My other posts about VIX and contango:
Contango As A Gold Mine And Why Should Bitcoinists Care
Is Fat Passive Income From VIX Dead Forever?
(Cover photo: Pixabay.com)